I'm Swiss-born, served as a Marine jet attack aviator in the Korean and pre-Vietnam era. I received an MBA from UC Berkeley in 1962, with highest honors. I've held top management positions at GM, BMW, Ford, Chrysler and retired from GM as Vice Chairman in 2010 at age 78. My two successful books are "Guts: The Seven Laws of Business That Made Chrysler The World's Hottest Car Company" (Jonn Wiley+Son, 1998) and, more recently, "Car Guys vs. Bean Counters: The Battle For The Soul Of American Business" (Portfolio Press, 2010) Most current book "Icons and Idiots" (Portfolio Press, 2012). I'm a contributor for Road & Track Magazine along with CNBC, and appear with some frequency on "Larry Kudlow." I serve on numerous startup boards, am a Leigh Bureau professional lecturer and provide consulting services to a number of clients. I tend to have strong opinions which I share with enthusiasm ... some would say "to a fault." My personal motto is "Often wrong, but seldom in doubt." For more information, visit my website, boblutzsez.com.

The Real Story On GM's Volt Costs

I was surprised to read Ben Klayman’s piece on alleged astronomical per-unit losses on the Chevrolet “Volt.” Ben is usually a solid professional who checks his facts.

The statement that GM “loses” over $40K per Volt is preposterous. What the “analyst” in whom poor Ben Klayman placed his faith has done is to divide the total development cost and plant investment by the number of Volts produced thus far. That’s like saying that a real estate company that puts up a $10 million building and has rental income of one million the first year is “losing” 9 million dollars, or several hundred thousand per renter.

Listen, Ben and Micheline: that’s not how car business cost accounting works.

Let me provide a look at how a car company tracks profitability of a product program: measured are material cost and labor, and these are deducted from the selling price. The positive difference is called “gross margin.” Then, one allocates per-unit “fixed cost” (advertising, general overhead, etc.) plus per-unit depreciation and amortization of the initial investment, based on the TOTAL NUMBER TO BE PRODUCED OVER THE LIFETIME of the product. If the margin, after all deductions, is still positive, then we call it a “fully accounted profit,” and the car is a winner.

The Volt “variable cost” (labor and materials, without revealing any confidential GM information), looks very roughly like this: A Li-Ion battery today runs about $350 per KWh. The Volt’s is 16KWh, so that’s roughly $6000. Add $4,000 for the battery pack structure, the cooling, the high-voltage wiring, the motor and the power electronics. So, that’s the electric portion. Add about 20 hours of assembly labor which we’ll round to a very generous $1000. The dealer net price is, say, $37,000. We now have $26,000 left for the rest of the car, which, cost-wise, is about equal to a Chevy “Cruze” which sells for around $22,000 retail! (And the Volt has no costly conventional transmission.) Thus, the “Volt”, by my estimate, is either close to “variable break-even” or may be on the cusp of a positive gross margin. Deduct the per-unit allocation for all fixed cost, depreciation and amortization and it is, surely, still “under water”….but not by much, and less and less so as the volume builds and other, higher-margin GM cars, like the Cadillac ELR, piggy-back off of the Volt’s initial investment.

Maybe the Volt, a first-generation technology masterpiece and the most-awarded car in automotive history, will never make a really decent profit.

But succeeding generations of the same technology will. Meanwhile, the happy Volt buyers (most satisfied owners of any nameplate in the market) are getting more that they paid for. (Is that so bad?)

We won’t even factor in the profound halo effect the introduction of the Volt has had on GM’s reputation as a leader in environmental automotive technology; it’s priceless, and could never have been achieved without it.

So, once again, the knee-jerk Volt bashers, devoid of any real knowledge, have had their usual joyous verbal catharsis, but the car doesn’t care: The volumes are building globally and it’s doing exactly what it was designed to do.

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@ChrisRogers. I agree that $40k and a 10 year recoup of costs is quite a a lot. I lease a Volt and offer a different perspective: http://michaelfinger.tumblr.com/post/29244580145/my-volt-first-month-by-the-numbers

Agreed. I am a big time fiscal conservative, but the ignorance displayed in this thread, and the apparent unwillingness to accept a fairly straightforward explanation based on simple math because of political ideology is astounding, and why I am not affiliated with any party. I have run the numbers on this car, for my situation, and I just got back from a test drive. We are leaning toward the volt. I am a car guy and I like sports cars. I have one and enjoy the sunday morning high speed drive down a two lane blacktop. But that car gets 13 MPG (when I drive it, 17 when my wife drives it) and is not practical on a daily basis. Anyway, we work out of our house, and our average trip is just about 30 miles. We pay 10.5 cents/kilowatt hour for electricity. I am pretty confident I can get the base model (which is pretty loaded) on a 36 month lease with about $2,500 down @ $275 a month. The car is quiet, handles relatively well, accelerates fairly quickly, and has all the options I want in a car. Most of our trips are business related, so we’ll be writing off most of payment. Our fuel costs will drop over 80% because based on my calculations and comparisons with hundreds of real world results from current owners we will be on electric (nuclear sourced, BTW) well over 90% of the time – the 2013 model has a better EV range than the 2012 model.

Another thing I don’t quite understand is the concept of payback. I mean, I understand what it means, but really, I’m not sure why so much is made of that in these cases and there are a lot of what-ifs that seem more likely now than they did a few months ago. What about $5/gallon gas? (I mean nation wide – it’s already $5 in California) What about shortages if the mid-east goes to hell? Seriously – what is the “payback” on a $90,000 Mercedes SL or a Porsche Cayenne? I don’t think people that buy Porsches are stupid and I don’t think people that buy Volts are stupid.

And one thing I wish Republicans would quit doing is blaming the car bailout solely on Obama. I think that he is a poor excuse for a president, but Bush initiated them bailouts, and I didn’t agree with it then either. You know, this isn’t high school and it’s not all black and white. You can call out your own guy when he screws up – he did and you should. And really, some of you might want to take a remedial economics class before commenting. I am embarrassed for you.